Snowflake Inc. (SNOW) is scheduled to report its fourth-quarter and full-year results on February 28. Wall Street expects the company to post higher earnings and revenue over the prior-year quarter. In this piece, I have discussed why it could be wise to avoid the stock now despite the potential rise in earnings and revenue during the fourth quarter.

For the fourth quarter, SNOW’s EPS and revenue are expected to increase 25.3% and 29.1% year-over-year to $0.18 and $760.22 million, respectively. The company has a stellar earnings history, having beaten the consensus EPS estimate in each of the trailing four quarters.

The company’s third-quarter revenue and earnings were above analysts’ expectations. At the end of the third quarter, SNOW had 436 customers with trailing-12-month product revenue greater than $1 million and 647 Forbes Global 2000 customers, representing growth of 52% and 10% year-over-year, respectively.

Snowflake’s net revenue retention rate was 135% as of October 31, 2023, while remaining performance obligations grew 23% year-over-year to $3.70 billion.

Commenting on SNOW’s third quarter performance, its Chairman and CEO Frank Slootman said, “During Q3, product revenue grew 34% year-over-year to reach $698 million, and non-GAAP adjusted free cash flow was $111 million, representing 70% year-over-year growth. These results reflect strong execution in a broadly stabilizing macro environment.”

For the fourth quarter, SNOW expects its product revenue to come between $716 million and $721 million, indicating a growth of between 29% and 30% year-over-year. Its non-GAAP operating income margin is expected to be 4%. The company expects its fiscal 2024 product revenue to come in at $2.65 billion, indicating an increase of 37% year-over-year.

Its non-GAAP product gross profit margin for fiscal 2024 is expected to be 77%, and its non-GAAP operating income margin is forecasted to come in at 7%. Additionally, its adjusted free cash flow margin is projected at 27%.

Barclays downgraded SNOW from overweight to equal weight. A team of analysts led by Raimo Lenschow wrote in an investor note, “For SNOW, we are not comfortable to push the current high multiple (~16x CY25E EV/Sales) further as there is a lot of consumption recovery or new product contribution needed to deliver accelerating product growth.”

Meanwhile, Monness Crespi Hardt’s analyst Brian White downgraded SNOW to Sell from Neutral, maintaining his $160 target price.

In a research note, Brian White wrote, “Benefiting from an overly exuberant tech market in the final quarter of 2023 and riding the coattails of an unprecedented AI hype cycle, Snowflake has rebounded sharply over the past couple of months. In our view, this has left the stock overvalued and vulnerable to selling pressure.”

White said, “Similar to most enterprise software players and the tech world at large over the past year, Snowflake has infiltrated its earnings calls, investor conferences, and customer events with generative AI fervor.”

“Unlike Alphabet and a few other tech companies, Snowflake is not recognized as a pioneer in AI nor a leading player in the generative AI movement; however, it has hitched its wagon to tech’s zeitgeist with the CEO’s simple axiom, ‘there’s no AI strategy without a data strategy,’ and the rest is history,” he added.

SNOW’s stock has gained 47.3% over the past six months and 49.8% over the past year to close the last trading session at $229.34.

Here’s what you might want to consider ahead of its upcoming earnings release:

Robust Financials

SNOW’s revenue for the fiscal third quarter ended October 31, 2023, increased 31.8% year-over-year to $734.17 million. Its net cash provided by operating activities rose 52.5% over the prior-year quarter to $120.91 million. The company’s non-GAAP gross profit increased 38.5% year-over-year to $549.93 million.

In addition, its non-GAAP operating income rose 65.9% over the prior-year quarter to $71.94 million. Its non-GAAP net income attributable to SNOW increased 133.6% year-over-year to $90.11 million. Also, its non-GAAP EPS came in at $0.25, representing an increase of 127.3% year-over-year.

Favorable Analyst Estimates

Analysts expect SNOW’s EPS and revenue for fiscal 2024 to increase 218.8% and 35.2% year-over-year to $0.80 and $2.79 billion, respectively. Its EPS and revenue for fiscal 2025 are expected to increase 41.3% and 30.2% year-over-year to $1.13 and $3.64 billion, respectively.

Mixed Profitability

In terms of the trailing-12-month gross profit margin, SNOW’s 67.09% is 36.7% higher than the 49.09% industry average. Likewise, its 36.11x trailing-12-month levered FCF margin is 306.7% higher than the industry average of 8.88x.

On the other hand, SNOW’s 1.04% trailing-12-month Capex/Sales is 55.3% lower than the industry average of 2.34%. Additionally, its 0.36x trailing-12-month asset turnover ratio is 40.5% lower than the 0.61x industry average. Furthermore, its negative 36.54% trailing-12-month EBITDA margin compares to the 9.31% industry average.

Stretched Valuation

In terms of forward non-GAAP P/E, SNOW’s 287.74x is substantially higher than the 24.93x industry average. Its 4.73x forward non-GAAP PEG is 132.8% higher than the 2.03x industry average. Likewise, its 232.56x forward EV/EBITDA is considerably higher than the 15.39x industry average.

POWR Ratings Reflect Bleak Prospects

SNOW has an overall D rating, equating to a Sell in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. SNOW has a D grade for Value, in sync with its elevated valuation. Its mixed profitability is consistent with its C grade for Quality.

SNOW is ranked #62 out of 76 stocks in the Technology - Services industry. Click here to access SNOW’s Growth, Momentum, Stability, and Sentiment ratings.

Bottom Line

SNOW is expected to have witnessed strong deal wins during the fourth quarter and is likely to beat the consensus revenue and earnings estimates. The company has seen its stock price jump due to the buzz around generative AI. However, many analysts believe that it is not a pioneer in AI and is merely riding the buzz around the Gen-AI theme.

The company has seen its revenue growth stutter over the past few quarters. Moreover, its net revenue retention rate has also shown a decline over the past few quarters. Furthermore, the company is facing rising competition from Hewlett Packard Enterprise’s GreenLake platform and Salesforce’s introduction of Genie.

Additionally, SNOW’s consumption-based revenue business model is prone to economic cycles, which provides less transparency into its growth prospects.

Given SNOW’s stretched valuation and uncertain near-term prospects, it could be wise to avoid the stock now.

Stocks to Consider Instead of Snowflake Inc. (SNOW)

The odds of SNOW outperforming in the weeks and months ahead are significantly compromised. However, there are many industry peers with impressive POWR Ratings. So, consider these three A (Strong Buy) and B-rated (Buy) stocks from the Technology - Services industry instead:

Dropbox, Inc. (DBX)

Leidos Holdings, Inc. (LDOS)

Box, Inc. (BOX)

What To Do Next?

Get your hands on this special report with 3 low priced companies with tremendous upside potential even in today’s volatile markets:

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SNOW shares rose $1.41 (+0.61%) in premarket trading Monday. Year-to-date, SNOW has gained 15.25%, versus a 6.85% rise in the benchmark S&P 500 index during the same period.

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.

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